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Stable value investment contracts

A number of financial contracts designed to provide protection for stable value strategies have evolved over the past 30 years. Contract value protection
means that participants who invest in stable value can typically transact at principal plus accrued interest, regardless of the market value of
the stable value fund’s underlying assets. Participant-initiated transactions typically include benefit withdrawals, loans, and transfers. Three
commonly used stable value investment contracts include: traditional GICs, separate account GICs, and synthetic GICs (also known as security-backed
investment contracts). Many stable value investment strategies utilize a combination of contracts from these three alternatives/categories. While
all the financial contract structures share a common goal of providing contract value protection for participant initiated transactions, each alternative
has distinct considerations which include, but are not limited to, differing contractual terms, ownership/custody of fund assets, and protection
benefits.

Traditional GICs

Introduced by insurance companies in the late 1970s, traditional GICs are still widely used in stable value strategies today, and are perhaps the most
easily understood of the financial contract structures available in the marketplace. A traditional GIC is a group annuity contract issued and backed
by the financial strength of the insurance company. Traditional GICs provide a fixed rate of interest over a specified time period. Upon
maturity, the issuer is obligated to repay principal plus accrued income back to the stable value fund. While GICs are not insured by any federal
agency, GICs offer direct and explicit guarantees from issuing insurance companies. As a policy holder, a stable value fund has priority claim
over bond and equity holders should the issuing entity experience default during the term of the agreement. The contract reserves for GICs are
held in the insurer’s general account, and the ability of the insurer to meet its contractual obligations ultimately depends on its financial stability.

Separate account GICs*

Separate account GICs were created in the late 1980s by insurance companies. Separate account GICs are generally issued as group annuity contracts
and offer certain guarantees from the issuing insurance companies. Like traditional GICs, separate account GICs seek to enable participants to
make contract value withdrawals (principal plus accrued interest) subject to certain conditions. Unlike a traditional GIC, separate account GIC
assets are invested in a portfolio of marketable fixed income securities and segregated for the exclusive benefit of the policy holder which is
the plan trust. While ownership of the assets is retained by the insurer, separate account GIC assets are insulated from the insurance company’s
general account.

Synthetic GICs (Security backed investment contracts)

Synthetic GICs (also called security-backed investment contracts), were developed in the late 1980s/early 1990s. The introduction of synthetic GICs
represented a departure in the stable value world from traditional GICs and separate account GICs in that this type of structure unbundled the
contract value guarantee from the ownership of the plan assets. Thus, two distinct components were established: 1) a portfolio of marketable fixed
income securities (i.e. bonds) owned outright by the plan trust and 2) stable value investment contracts issued by various financial institutions
such as banks and insurance companies. Unbundling ownership of the underlying plan assets from the investment contract component offers the plan
direct access to the underlying assets if the insurer experiences financial difficulty. With synthetic GICs (security backed investment contracts),
the plan trust retains 100% direct ownership over the underlying portfolio of fixed income securities. Direct control of the assets clearly limits
exposure to the issuer of the stable value investment contract is further reduced to any shortfall that might occur between a synthetic GIC’s contract
value and market value of the assets.

Contract strategy and issuer placement

The stable value asset class has been well-served by the variety of financial contract options available to provide benefit responsive features for
participant transactions. However, these contracts are highly complex financial instruments, and like any investment, are not risk free. Investment
contracts typically include certain provisions which limit their ability to provide participants with contract value payouts under certain circumstances.
These risks and circumstances should be understood and carefully weighed when evaluating stable value investment options.

Since contractual terms are customized, a stable value manager may negotiate with contract issuers on behalf of plan sponsors. Therefore, contract
negotiation, management, and administrative expertise, are as critical and valuable as the adeptness and skill of a fixed income manager in stable
value investing. A holistic stable value management approach that effectively integrates the two core components of contract management and fixed
income management ultimately results in a more optimal client aligned stable value investment solution.